If you’re an Indian resident moving to places like the USA, Singapore, Canada, or the UK for work, studies, or business, your status changes from resident to non-resident after living there for a few months. Once this happens, there are certain rules and regulations that you, as a Non-Resident Indian (NRI), need to follow. One crucial aspect that many NRIs overlook is updating their residential status in various financial accounts like bank accounts, demat accounts, and with insurance companies. Unfortunately, not being aware of this requirement can lead to penalties under the FEMA act for non-compliance.
In many cases, NRIs fail to inform banks and other authorities about their change in residential status. This oversight can result in no TDS (Tax Deducted at Source) being deducted on their savings account interest or fixed deposit interest, or if deducted, it might happen after crossing the threshold limits. Unlike residents, NRIs don’t have a threshold limit, and banks are required to deduct TDS under section 195 of the income tax on savings and fixed deposit interest, regardless of the amount. However, if the income is below the taxable limit of INR 250,000, NRIs can file an income tax return to claim a refund after filing.
Now, let’s focus on our blog topic. It is crucial for NRIs to update their residential status with the bank. This is because NRIs are not allowed to operate regular Indian saving bank accounts. Instead, they can operate NRO (Non-Resident Ordinary), NRE (Non-Resident External), or FCNR (Foreign Currency Non-Resident) accounts. When an NRI updates their status with the bank, the bank either converts the existing saving account to an NRO/NRE account or the NRI can open a new NRO account.
Generally, the NRO account is maintained in Indian Rupees and can be opened by any NRI living outside India. However, individuals of Pakistani or Bangladeshi origin need prior approval from the RBI to open an NRI account.
NRO accounts can be held jointly by two or more NRIs or with a resident individual in India. There are three main types of NRO accounts: Saving NRO account, current recurring NRO account, and fixed deposit NRO account.
It’s essential to be aware of permissible credits in an NRO account. There are limits on the amounts that an NRI can receive in their NRO account. For example, inward remittances from outside India, transfers from one NRO account to another, and gifts from relatives who are residents can be credited to the NRO account, subject to the Liberalized Remittance Scheme (LRS) limit.
In conclusion, NRIs need to promptly update their residential status with the bank to avoid complications. Failure to do so can result in financial consequences, including the lack of TDS deductions and potential penalties under FEMA. By converting their saving bank accounts to NRO/NRE accounts, NRIs can continue to manage their finances smoothly while staying compliant with the regulations.
